A Life Beyond Europe: What Does Article 50 Mean for Sterling?

As Theresa May dashed for the exit and the Brexit train picked up speed, anticipating how Sterling would react became little more than a fool’s game. When Downing Street confirmed the triggering of Article 50 at the beginning of March, almost every trader had a bearish outlook. Global award-winning forex broker FXTM, reports that 95% of its clients were trading short on the GBPUSD in the run up to Wednesday, 29 March.

“Since the result of the EU Referendum last June, buying sentiment towards British Sterling has been predominantly negative,” explains Jameel Ahmad, VP of Corporate Development and Market Research at FXTM. “The Pound saw some upsides the week before Article 50 was triggered, but the main catalyst behind this rebound was Dollar weakness, and the majority of traders maintained a negative view on the GBPUSD. The pair has been the subject of sell-on rally opportunities around the 1.25 region for some time.”

Wednesday was no exception, and the Pound took a slump to 1.24 as May signed the letter that began formal negotiations. “My personal outlook on the Pound is negative,” confirms Ahmad, downplaying the corrective bounce theory voiced by a number of his peers the week before the invoking of Article 50. “I am not willing to entertain the theory of a corrective bounce until the GBPUSD moves back above the 1.32 level on a weekly or monthly basis.”

Much of the confusion over the future direction of the Pound is down to uncertainty. A full member state has never left the trading Bloc before, and no one knows what shape an unshackled UK might take. The provisions May negotiates for key sectors such as agriculture, energy, trade, and tourism, will have a huge impact on the long-term health of Sterling. Westminster has been careful to emphasize that the UK is unlikely to retain a shared customs union or free trade agreements -- both of which will impact trade deficits and currency values. The threat of a potential Scottish Independence Referendum, coupled with any apparent ‘hard-Brexit’ sentiment from European leaders, could reignite negative buying sentiment and send the currency tumbling as the Brexit negotiations progress.

Likewise, any positive developments over the next couple of years may well buoy the currency, even if only temporarily. With rising right-wing sentiment and Euroscepticism gripping the continent, the UK could secure a better deal than anyone thought possible. If the National Front win the French election in late April/early May, for instance, Britain will have at least one powerful ally at the negotiating table -- Marie Le Pen will be pushing for a better deal in the hopes of encouraging the French electorate to vote out as well.   

While a Brexit deal is finalized, preventing a directionless meander between Sterling losses and gains will be high on the Westminster agenda for the next two years. May’s careful courting of the media in recent weeks is no accident – her U-turn on Philip Hammond’s National Insurance plan was widely seen as a move to curry favor with the (predominantly pro-Brexit) media. As an Independent UK takes shape, the headlines will have a huge impact on buying sentiment and short-term currency values. The British Prime Minister might not be able to control the usual gaggle of Front Benchers with a tendency to voice contradictory opinions, but she can ensure the broadsheets are singing the right tune. Ensuing Brexit negations will be the deciding factor in the level Sterling trades at, and positive reporting will go a long way towards bolstering the currency.  

The Pound is not going to reach pre-July levels anytime soon. Uncertainty surrounding Brexit will limit any serious upside, and complications will likely expose the currency to another volley of sell-offs. With an unpredictable election in France looming, the Scottish First Minister pushing for Independence, and elections pending in Germany, the markets are likely to remain volatile for the foreseeable future.